TY - JOUR
T1 - A structural model of cost pass-through
T2 - the case of the US yogurt retailing
AU - Hovhannisyan, Vardges
PY - 2018/9/1
Y1 - 2018/9/1
N2 - We provide a structural framework for retail cost pass-through based on a neoclassical inverse demand model and retail profit maximization conditions. Unlike previous literature where game-theoretic structures are imposed on cost pass-through, our framework allows for estimating cost pass-through and the degree of market competition simultaneously. Further, our model incorporates potential cross-brand effects representing demand substitution and strategic complementarity effects. Our model supplements the traditional reduced-form approach to pass-through and is applicable in environments, where the lack of brand-level cost data renders reduced-form analysis infeasible. The empirical value of our model is illustrated in an econometric analysis of retail pass-through for national and store brand yogurt. Our results indicate that: (1) market competition has a positive impact on own-brand cost pass-through, especially for national brands, and (2) overlooking cross-brand effects results in biased own-brand pass-through estimates. Finally, we provide a graphical illustration of the relationship between cost pass-through and market competition.
AB - We provide a structural framework for retail cost pass-through based on a neoclassical inverse demand model and retail profit maximization conditions. Unlike previous literature where game-theoretic structures are imposed on cost pass-through, our framework allows for estimating cost pass-through and the degree of market competition simultaneously. Further, our model incorporates potential cross-brand effects representing demand substitution and strategic complementarity effects. Our model supplements the traditional reduced-form approach to pass-through and is applicable in environments, where the lack of brand-level cost data renders reduced-form analysis infeasible. The empirical value of our model is illustrated in an econometric analysis of retail pass-through for national and store brand yogurt. Our results indicate that: (1) market competition has a positive impact on own-brand cost pass-through, especially for national brands, and (2) overlooking cross-brand effects results in biased own-brand pass-through estimates. Finally, we provide a graphical illustration of the relationship between cost pass-through and market competition.
KW - Conjectural variations parameter
KW - Own-/cross-brand pass-through
KW - Retail competition
KW - The benefit function-based demand
UR - http://www.scopus.com/inward/record.url?scp=85021731998&partnerID=8YFLogxK
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U2 - 10.1007/s00181-017-1283-9
DO - 10.1007/s00181-017-1283-9
M3 - Article
AN - SCOPUS:85021731998
VL - 55
SP - 805
EP - 830
JO - Empirical Economics
JF - Empirical Economics
SN - 0377-7332
IS - 2
ER -